Detroit-owned real estate worth $1B, financial creditor argues

10:06 PM, July 28, 2014

The City of Detroit owns or controls the fate of vacant and blighted properties that could be worth as much as $1.2 billion, according to a holdout financial creditor that is fighting the city's bankruptcy restructuring plan. / Patricia Beck/Detroit Free Press

Detroit Free Press Business Writer

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The City of Detroit owns or controls the fate of real estate worth as much as $1.2 billion, according to a holdout financial creditor that is fighting the city’s bankruptcy restructuring plan.

Financial Guaranty Insurance Co. (FGIC), which could lose more than $1 billion on the city’s bankruptcy, pegged the value of city-owned real estate at $1.1 billion to $1.2 billion, according to a Detroit bankruptcy document obtained by the Free Press.

That includes properties assessed at $512 million that the city could foreclose upon, FGIC noted.

In a separate report, an art consultant hired by FGIC estimated that the Detroit Institute of Arts’ entire collection is worth $8.5 billion. That assessment, completed by New York-based fine art consultant Victor Wiener, contrasts with the city’s estimate that the entire collection is worth up to $4.6 billion but would fetch far less in a fire sale.

FGIC and other major holdout financial creditors are expected to use their expert assessments to argue that Detroit emergency manager Kevyn Orr’s restructuring plan treats them unfairly.

The city will lean on its own expert reports and witnesses in a bid to convince Judge Steven Rhodes that the restructuring plan — which would slash more than $7 billion in debt and trigger a $1.7-billion reinvestment plan — is fair, legal and feasible.

Rhodes will consider the evidence during a massive bankruptcy trial scheduled to begin Aug. 14. Following the trial, Rhodes is to decide whether to allow the city to exit bankruptcy.

In the FGIC expert report evaluating the city’s plan, Houlihan Lokey financial adviser Steve Spencer concludes that Detroit could extract significant value from its empty land. The city government owns about 22 square miles of real estate and could foreclose on many other properties that have delinquent property tax bills.

“Recent home sales suggest a prospective resurgence in property values that could further increase value realization, substantiating the possibility that significant long-term value may be potentially realized in connection with the City’s real estate holdings,” Spencer wrote.

The assessment conflicts with Ernst & Young consultant Caroline Sallee’s recent report that the collapse in Detroit’s residential property values would continue for several years — with taxable value falling by 2% to 4% each year from 2016 and 2020 and then dropping 15% following a massive reappraisal effort.

“Based on historical data showing how the city came out of past recessions, the evidence does not support a quick rebound,” Sallee concluded in a report delivered for the City of Detroit’s bankruptcy lawyers.

FGIC’s Spencer acknowledged that “city property values have plummeted” and that blight-removal requirements might mean his assessment overestimates the value of the city’s property.

But he noted that Detroit Mayor Mike Duggan recently embarked on a campaign to auction off Detroit houses to responsible homeowners — with 30 homes sold for about $2 million.

“Because Detroit remains an important regional hub for manufacturing, logistics, technology and other industries, the city’s rehabilitation will drive longer-term value appreciation for the city’s vast land holdings,” Spencer said.